Kuroda Leads Japan Down Bernanke’s Path of Escalated EasingToru Fujioka
Haruhiko Kuroda yesterday followed in the footsteps of Ben S. Bernanke and Mario Draghi as he swung the Bank of Japan from incremental moves to unprecedented stimulus in his first policy meeting as governor.
The BOJ will double the monetary base by the end of 2014 through buying government bonds, the central bank said in Tokyo, in Japan’s biggest round of quantitative easing. JPMorgan Chase & Co. said the Japanese and U.S. central banks are now “in the same camp” when it comes to monetary stimulus.
With the Federal Reserve, the European Central Bank and the BOJ now pulling in the same direction, the risk for Kuroda is that taking an activist role may fuel expectations for more measures that he won’t be able to live up to. Swings in the yen, bonds and stocks today indicated investors were digesting yesterday’s move and its implications.
“A huge economic experiment is starting,” said Junichi Makino, chief economist in Tokyo at SMBC Nikko Securities Inc. a unit of Japan’s second-largest bank. “I see a risk that Kuroda will be the governor who proves the limit of monetary easing by doing everything that a central bank can.”
At stake is the credibility of Prime Minister Shinzo Abe’s economic program -- dubbed Abenomics -- and the chances of ending two decades of stagnation and meeting a 2 percent inflation goal.
“It’s true that the price target won’t be easy, but we can’t meet it by incremental easing,” Kuroda told reporters yesterday in Tokyo. “I’m confident that every essential measure is included in today’s decision.”
The yen dropped to 97.19 per dollar, the lowest since 2009, before trading at 96.35 as of 5:01 p.m. in Tokyo. In Hong Kong, billionaire investor George Soros told CNBC that the currency’s fall has the potential to become “an avalanche,” describing the nation’s policies as “quite dangerous.”
The Nikkei 225 Stock Average climbed above 13,000 for the first time since August 2008, increasing as much as 4.7 percent before closing with a gain of only 1.6 percent. The 10-year bond yield slid to a record low and then rebounded. Bond futures plunged.
The BOJ set a two-year horizon for its inflation goal and said it was shifting its attention from the benchmark interest rate to the monetary base -- cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the measure will grow to 270 trillion yen ($2.8 trillion) by the end of 2014.
Lawmakers voted to confirm Kuroda today for a full 5-year term as governor. The BOJ will be flexible in its approach to easing in the pursuit of the 2 percent inflation target, he told a parliamentary committee today.
“Even if we haven’t reached 2 percent, if it’s going to be reached, or exceeded, then of course we would adjust policy,” Kuroda said. “If Japan reached the target due to temporary reasons, and there is no likelihood of it continuing in that region, then it would be necessary to continue easing.”
ECB President Draghi broke with predecessor Jean-Claude Trichet by pursuing a more forceful campaign to end the euro-region debt crisis, declaring there aren’t “any taboos” for the bank. Draghi said yesterday that policy will stay accommodative for as long as needed. Fed Chairman Bernanke has overseen more than $2 trillion in emergency aid, three rounds of asset purchases and record-low interest rates.
The ECB took five years from 2008 to achieve a near doubling in its balance sheet, as the BOJ is planning. Bernanke boosted the Fed’s by more than 150 percent in four months during the global financial crisis.
“Kuroda is easing more than Draghi,” said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. “He’s also buying more risky assets, such as exchange-traded funds, so in that sense he’s more aggressive than Bernanke.”
Kuroda’s predecessor, Masaaki Shirakawa, failed to end price falls in a term marred by three recessions, leaving the economy smaller than when he took office. When he announced he was stepping down, stocks soared to a four-year high. Yesterday, the Nikkei 225 Stock Average rose 2.2 percent.
The world’s third-biggest economy grew an annualized 0.2 percent in the fourth quarter of last year after two straight contractions. Prices excluding fresh food haven’t risen 2 percent in any year since 1997, when the sales tax increased. In February this year, they fell 0.3 percent.
By abandoning an interest-rate target in favor of goals for the size of the monetary base, Kuroda is digging into a similar toolkit as that used by Paul Volcker, who became chairman of the Fed in 1979 with the opposite task: to break the back of inflation that was too high.
The Fed targets a near-zero rate for overnight interbank loans even after shifting its focus four years ago to buying bonds and boosting the size of its balance sheet.
The BOJ’s 2 percent inflation target echoes the Fed’s adoption of a 2 percent goal in January last year. Bernanke told lawmakers in Washington on Feb. 26 that he supported Japan’s efforts to exit deflation.
“Kuroda is very mindful of the Fed, he wants to catch up,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. in Tokyo. “He is trying to lift Japan’s economy by keeping the yen weak, boosting stocks and improving sentiment.”
Kuroda’s pledge last month to do “whatever it takes” to end deflation came after Draghi made the same vow last year in relation to saving the euro.
The BOJ board yesterday agreed to temporarily suspend a cap on bond holdings and dropped a limit on the maturities of debt the bank buys. The BOJ will purchase 7.5 trillion yen of bonds a month along with more risk assets, a shift that Kuroda said will mean the bank is buying the equivalent of 70 percent of government bond issuance.
The bank will buy more than 150 trillion yen in bonds, exchange-traded funds and other securities through the end of 2014, more than triple the balance sheet increases in two previous periods of easing.
Japan’s monetary base was at a record in March, after rising by more than 50 percent in five years.
Not everyone is confident that Kuroda’s plan will work. Former BOJ board member Atsushi Mizuno last month said more bond purchases could inflate a market bubble, while Kazumasa Iwata, a former deputy governor, deemed Kuroda’s two-year goal impossible.
“There isn’t much room left for Kuroda to expand bond purchases,” said Takahiro Sekido, strategist at the Bank of Tokyo-Mitsubishi UFJ Ltd., who formerly worked at the BOJ. “With today’s easing, the ball is back in the government’s court.”
In December, Abe led his party to electoral victory by pledging to fire “three arrows” to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring.
Population aging and a government debt more than twice the size of the economy are constraints, while the yen’s decline since November is boosting the cost of fuel imports after nuclear power-plant shutdowns. Sales-tax increases set for 2014 and 2015 may damp consumption.
“There has to be increased lending by banks, and I think firms need to start believing that they need to raise prices,” said Izumi Devalier, Japan economist at HSBC Holdings Plc in Hong Kong. Kuroda “is hoping that the mindset of economic participants will change,” she said.